Saturday, May 30, 2009

Land Value Tax & Banking Reform

Economists know that to tax scarce resources such as the economic rent of land (i.e. land value tax) is a far better way of raising tax without causing economic damage than to tax work and goods. For instance Mervyn King (now Governor of the Bank of England) wrote in his book The British Tax System (1990 5th Ed) on p.179: ‘the underlying intellectual argument for seeking to tax economic rents retains its force’. He comments on the British tax system (p.185): ‘complexity, anomalies, inequities and disincentives…half-baked measures…repeatedly modified…without any sense of long term strategy...’ .

At the Southampton University seminar (see Blogs from 19 May onwards), following questions from the floor, the academics had no disagreement about taxing land values. But they seemed to consider the idea as not really affecting economic growth compared with the effect of credit creation. But the auspices of the Centre holding the seminar includes the term ‘sustainable development’. Introducing a tax shift from that on work, business and goods whilst taxing land would remove disincentives to enterprise and incentivize owners of land to use it more efficiently. Richard Werner’s method of using Japanese ‘window guidance’ by the central bank towards productive investment, in the credit creation process, restricts freedom and choice for citizens and assumes that the central bank has perfect wisdom, is without corruption and is properly directed by Parliament. Besides, people will still be able to put ‘existing money’ (or mis-directed ‘new money’) to use in speculative property deals. So why not introduce land value tax as a tool to dampen property bubbles as they gather pace, or to promote property investment when needed and, incidentally, to help to reform tax in the direction Mervyn King wants?

The Japanese experience shows that a fair society needs checks and balances. The current global financial fiasco and the UK Parliamentary expenses scandal reinforces this view. Tax reform and monetary reform are not incompatible – together they would give rise to a more sustainable economic system and a fairer society.